Grassroots News & Progressive Views

Student Loan Debt: The Only Debt You Can’t Discharge in Bankruptcy

Today’s students are being crushed with John Bunyan’s proverbial burden on their backs – student loan debt. Until relatively recently this debt could have been discharged in bankruptcy.

Then all that changed when Sallie Mae, the Student Loan Marketing Association, was privatized in 2004. Albert Lord, the new CEO, and his lobbyists went to work to change the laws so that student loans could not be discharged in bankruptcy. Today the cumulative student loan debt is more than $1 trillion.

While a generation ago a high school diploma was considered sufficient for a decent middle class entry level job, today it’s a college diploma even if the job itself could be easily accomplished by a person with just a high school education.

In Sallie Mae annual reports, CEO Albert Lord has boasted that the company’s extraordinary financial growth could be attributed to fees collected from defaulted loans, as well as loan origination growth. Lord, who personally invested hundreds of thousands of dollars (on the books) in politicians and PACs involved with education legislation is probably the largest individual beneficiary of student loan privatization.

In 2001, US News reported that Mr. Lord’s compensation for the year 2000 had skyrocketed to over $33 million. From 1999-2004, Sallie Mae’s top two executives, Al Lord and Tom Fitzpatrick, received compensation worth $225 million and $245 million, respectively. Both men have regularly topped Fortune Magazine’s list of highest paid CEO’s in the Washington D.C. Area. Albert Lord also put in a bid to purchase a major league baseball team, the Washington Nationals, with the wealth he extracted from defaulted borrowers.

While Albert Lord and others have profited handsomely from student loan privatization, many of the students themselves have been driven to despair after they graduate and payments on the loans become due. Similar to the pilgrim in John Bunyan’s Pilgrim’s Progress, they enter the slough of despond.

And God forbid they miss a payment or even go into default. Severe penalties double and triple and before they know it, they are owing three or four times the amount of their original student loan. Many student loan debtors, as another writer for the San Diego Free Press explains, have taken the only route out of this living hell they could think of: suicide. It seems that law students are particularly vulnerable to the privatized loan scam since their aspirations are so high and their actual results after graduation are so devastating.

Suicide is the dark side of the student lending crisis and, despite all the media attention to the issue of student loans, it’s been severely under-reported. I can’t ignore it though, because I’m an advocate for people who are struggling to pay their student loans, and I’ve been receiving suicidal comments for over two years and occasionally hearing reports of actual suicides. More people are being forced into untenable financial circumstances as outstanding student loan debt has surpassed $1 trillion. And people simply aren’t able to pay all the money they owe. In the past few years, the rate of defaults for federal loans has increased at an alarming rate. According to theDepartment of Education, those recent graduates who began repayments in 2009, 8.8 percent had already defaulted on their federal loans. That compares to 7 percent in 2008. Currently, 36 million Americans have outstanding federal loans. I can’t help but wonder how many of those millions are feeling distressed or suicidal, or how many have attempted suicide because of all that debt hanging over their heads.

Taking advantage of low income students who want a better life for themselves than their parents had and the siren call of easy money loans that don’t have to be paid back for many years — after the student supposedly has snagged a lucrative professional job, the private loan industry has suckered unsophisticated high school graduates and led them down the garden path of a future filled with prestige and high wages.

The problem is when (and if) that student has obtained that degree, they find that (a) they can’t get that lucrative job because either that job isn’t available or their degree is worthless or (b) they have to move back in with their parents in order to afford the payments on their student loan.

And don’t even think about getting married and raising a family if you have a substantial amount of student loan debt. Each spouse is responsible for the other’s debts including student loan debts. Sort of a dowry in reverse. This is from AboveTheLaw.com

Good luck getting married with your large student loan debt. In the good old days, love conquered all. But today, love is a necessary but not sufficient condition for a lasting relationship. Now that student loan debt exceeds $1.2 trillion and shows no signs of stopping, it is probable that your future spouse will have considerable student loan debt. And you may have to face the possibility that by getting married, you may have to pay your spouse’s student loan debt — possibly for life.

It is common knowledge that large student loan debt is forcing young people to delay getting married and starting families. If both partners have small to moderate student loan debt, they can find a way to deal with it eventually. But those who paid off their student loans will be reluctant to marry someone with large student loan debt unless they have a good job and a realistic plan for paying it off in a short period of time.

Colleges and universities themselves are a major part of the problem. Over the last three decades, the price of a year of college has increased by more than 1,200%. They are selling the American Dream, especially to students from poor financial backgrounds. As we have reported previously, University of Phoenix and Ashford University are particularly culpable.

As Cornell professor Noliwe Rooks and journalist Kai Wright have reported, black college enrollment has increased at nearly twice the rate of white enrollment in recent years, but a disproportionate number of those African-American students end up at for-profit schools. In 2011, two of those institutions, the University of Phoenix (with physical campuses in 39 states and massive online programs) and the online-only Ashford University, produced more black graduates than any other institutes of higher education in the country. Unfortunately, a recent survey by economist Rajeev Darolia shows that for-profit graduates fare little better on the job market than job seekers with high school degrees; their diplomas, that is, are a net loss, offering essentially the same grim job prospects as if they had never gone to college, plus a lifetime debt sentence.

Instead of climbing out of poverty and creating a better life, the students that attend for profit universities end up more bogged down in the poverty muck and being worse off than they would have been if they had never gone to college.

It seems that the American Dream has become the American Scam enriching ambitious entrepreneurs whose combination of privatized education fueled by student loans has contributed to the American nightmare for many of those who would have been better off forsaking high end job fairy tales and instead learned a trade such as carpentry, plumbing, electrical work, nursing, teaching or masonry.

The for-profit institutions are all about maximizing returns for their shareholders, not maximizing the results of the educations they provide for their students.

For-profit colleges can be up to twice as expensive as Ivy League universities, and routinely cost five or six times the price of a community college education. The Medical Assistant program at for-profit Heald College in Fresno, California, costs $22,275. A comparable program at Fresno City College costs $1,650. An associate degree in paralegal studies at Everest College in Ontario, California, costs $41,149, compared to $2,392 for the same degree at Santa Ana College, a mere 30-minute drive away.

A lot of these subprime schools spend more money on lobbying and recruiting subprime students than they spend on their students’ educations. And many of these students never actually graduate although their accumulated student loan debt stays with them for life. Instead of a leg up in the world they get a kick in the backside. They become mired in debt and poverty. Today’s college graduates are in debt and not able to find a job.

The public universities themselves have seemingly taken a stupid pill. They have cozied up to Wall Street lusting after huge gains in the stock market and using fancy derivatives.

Beginning in the 1990s, universities, public and private, began working ever more closely with Wall Street, which meant using tuition payments not just as direct revenue but also as collateral for debt-financing. Consider the venerable but beleaguered University of California system: a 2012 report out of its Berkeley branch, “Swapping Our Futures,” shows that the whole system was losing $750,000 each month on interest-rate swaps — a financial product that promised lower borrowing costs, but ended up draining the UC system of already-scarce resources.

In the last decade, its swap agreements have cost it over $55 million and could, in the end, add up to a loss of $200 million. Financiers, as the university’s creditors, are promised ever-increasing tuition as the collateral on loans, forcing public schools to aggressively recruit ever more out-of-state students, who pay higher tuitions, and to raise the in-state tuition relentlessly as well, simply to meet debt burdens and keep credit ratings high. So Wall Street is directly responsible for high tuition rates. Who would have thunk it? Calling Occupy Wall Street.

Student tuition has had to bear the burden of the university’s gambling binge on Wall Street. When will they ever learn that a public bank could not only save them money but reduce the volatility associated with Wall Street?

The Department of Education (DOE), which could provide debt relief for student loan debtors is instead acting as a debt collector.

Another debtor, a 38-year-old attorney who suffered a pulmonary embolism and went into default as a result, is now more than $100,000 in debt. Bedridden and fully disabled, he accepts he will likely be in debt until his death. He asked that his name be withheld because he doesn’t want to incur the wrath of the government by disclosing the awful punch line to his story: After he qualified for federal disability payments in 2009, the Department of Education quickly began garnishing $170 a month from his disability check.

“Student-loan debt collectors have power that would make a mobster envious” is how Sen. Elizabeth Warren put it. Collectors can garnish everything from wages to tax returns to Social Security payments to, yes, disability checks. Debtors can also be barred from the military, lose professional licenses and suffer other consequences no private lender could possibly throw at a borrower.

On the brighter side, an offshoot of Occupy Wall Street called Rolling Jubilee is helping to pay off medical and student loan debt. They buy up the debt on the secondary market, the way collections agencies do, for pennies on the dollar and then simply pay it off. Why can’t the students themselves (or their agents) buy up their own debt this way and pay it off? Good question and maybe we’ll see more of that in the future.

In Judaism and Christianity, the concept of the Jubilee is a special year of remission of sins and universal pardon. In the Biblical Book of Leviticus, a Jubilee year is mentioned to occur every fiftieth year. In that year slaves and prisoners would be freed and debts would be forgiven. However, there is no jubilee year in capitalism. Society is less humane today.

Debt collectives or debtors’ unions may be the next step in fighting off the predatory lenders’ penchant for turning college graduates into indentured servants. Collective action can empower individual debtors who feel hopeless, powerless and desperate. You can congregate and share your story with others at studentloanjustive.com, a website started by Alan Collinge who is fighting for the repeal of the law that prevents you from discharging your loan in bankruptcy.

Or it might be better to just liberate yourself from the debt by refusing to pay it and living with the consequences. You would have to abandon whatever employment your degree bought you. You might have to leave the country in which case your future education will ironically be free. Or you can be self-employed working on a cash basis. Actually, self-employment is not a bad option. Knowing what you know now about the student debt rat race, you probably would have chosen that over a college degree in the first place. Students of the world unite. You have nothing to lose but the burdens on your backs!

You can join a DIY Resistance movement as San Diego Free Press writer Will Falk has and become modern day Robin Hoods taking from the rich to help the poor:

Part of my recovery from suicidal depression involves me recognizing poisoned thought patterns. Guilt over debt is poison. I have decided I will not pay my student loans back. I refuse to pay an illegitimate, occupying, imperial government engaged in genocide around the world for an education that should rightfully be free anyway. Now, when Heather-from-Sallie-Mae-Department-of-Education-Loan-Services leaves me a message, I am empowered to laugh.

Lately, for smiles, I’ve called myself a post-modern Robin Hood. Not paying my student loans is like stealing my education from the government. Just like Robin Hood of old, I stole my education, my intellectual experiences, and my degrees from the rich, and am using that education, those experiences, and the letters behind my name to fight for the poor. Come join me in a refusal to let money stop us from action. We can form a merry band and save the world while we’re at it.

John Lawrence

John Lawrence graduated from Georgia Tech, Stanford and University of California at San Diego. While at UCSD, he was one of the original writer/workers on the San Diego Free Press in the late 1960s. He founded the San Diego Jazz Society in 1984 which had grants from the San Diego Commission for Arts and Culture and presented both local and nationally known jazz artists. John received a Society of Professional Journalists, San Diego chapter, 2014 award. His website is Social Choice and Beyond which exemplifies his interest in Economic Democracy. His book is East West Synthesis. He also blogs at Will Blog For Food. He can be reached at j.c.lawrence@cox.net.

Goatskull: I definitely agree with you. One shouldn’t have to go to college to earn a decent living. We as citizens, and our entire gov’t, are being manipulated and controlled by the greedy. And when I say gov’t I,m including the Democrats and the Republicans, and everybody in between.

It is “possible” to have student loans discharged in bankruptcy, but the burden of proof that the borrower can’t pay the funds back, and has no prospects to ever pay it back is quite high. Very few borrowers get debt extinguished in bankruptcy.

But isn’t that how it should be? If these loans could be freely discharged in bankruptcy then they would become an unsecured personal loan, like credit cards, and will have credit-card-like interest rates. We would also have students borrowing, graduating, and declaring bankruptcy before they gain employment or buy a house to clean the slate.

I say, If you borrow money, understand the terms, and plan on paying it back.

Student loan debt is no different than any other debt. It should be dischargable in bankruptcy just like credit card debt. There are many good reasons to have it discharged, and they should all be considered by a bankruptcy judge. As you point out, the burden of proof for discharging student loan debt today is ridiculously high. About the only thing a judge will consider is permanent disability with no prospect whatsoever of ever paying it back. However, there are many other extenuating circumstances. After all what you say about “plan on paying it back” does not apply to credit card debt which is not always taken on by people planning to pay it back.

Student loans have not been dis-chargeable since 1976,
So maybe this is not a new phenomenon.

The author is probably referring to the non-discharge-ability of private student loans (student loans given beyond federal limits ) that occurred in 2005. Private student loans have grown exponentially in the last 20 years as the college costs have grown well beyond inflation and federal loan limits.

I have no problem restoring dis-charge-ability as long as unsecured student loan interest rats rise to compensate the increased risks. Would anybody lend to to a student at 4-6% today if the student could wipe out the loan in bankruptcy?

The absence of bankruptcy protections has destabilized the current system to the point of illegitimacy- even if it is extracting unearned profits from the citizens hand over fist. If you think you can demand fixing the system around that profit point, you are kidding yourself.

Also, There is a public benefit to having an educated citizenry that has been squeezed completely out of the conversation over the years. It deserves some due. I would say if the government could even just barely break even with standard consumer protections restored, that would be more than fine.

If the government wants to reduce it’s risk, it will begin doing its job by cracking the whip on the schools to keep their quality up and their costs down. It would also kick the horrible schools out of the program, put meaningful limits on how much it will lend (and tighten existing limits as is appropriate), and perhaps take other steps akin to underwriting (even if erring on the generous side). That would reduce risk and cost tremendously.

ps. Saying “its been this way for a long time” is not an argument. It’s been this way for at least ten years too long. The experiment is done, the results are in. That this unjust exemption has been kept in place as long as it has is what is truly astonishing, and everyone here knows it.

I just mentioned the 1976 date to refute the author’s original premise that student loan dis-chargeability was revoked “relatively recently”. This is not new. Also, any data that shows students did not abuse the system pre-revocation would have to examine the period prior to 1976…which if it exists, is likely meaningless as the student loan market is very different today with, among other things, much larger amounts involved.

Most (some 85%+) of the $1 trillion in student loans are of the Federally-guaranteed (non-private) variety. Which means taxpayers pay for defaults. While I sympathize with borrowers with impossibly-high student loan balances, and support some measure of reform, I would rather not bail them out at taxpayer expense.

“•2005: An amendment enacted by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (P.L. 109-8, 10/17/2005) added an exception to discharge for qualified education loans, which includes most private student loans. Before this amendment only private student loans made under a “program funded in whole or in part by a governmental unit or nonprofit institution” were excepted from discharge.”

Interesting in that this is the time period that Sallie Mae was fully privatized. Albert Lord and his lobbyists were taking no chances in getting his money back.

Don’t confuse the Department of Education with the Taxpayer. Sucking up to “The taxpayer” as you do tells me that you make your money sucking from the public tit either directly or indirectly.

That said:

The fact is that the Department of Education has been MAKING not losing money on defaults for years. Under FFELP the Education Department makes more on defaults than on healthy loans, and undoubtedly makes EVEN MORE under the Direct Loan program. They shovel huge amounts of this cash back out to their buddies no doubt…I don’t think the taxpayer has much to say about it, and probably gets back crumbs after the cronies (like you?) get their piece.

This is the worst example of the confluence of crony capitalism, big government, predatory lending that I can think of, but if you really want to defend it, Mike?

But if you really want to defend this big-government, family wrecking monstrosity, Mike, why don’t you tell us what your interest is, so we know where you’re coming from? Better yet, use your real name, like most people on this board are.

Hey Alan, well I am a taxpayer (but not a public servant), so if that qualifies as sucking up, okay.
If the DOE is making money, they won’t be for long with some 30% of all student loan borrowers delinquent or in default.

The default rates have been this high (higher actually) for federal loans for many years. In the absence of bankruptcy protections, statutes of limitations, and other fundamental consumer protections, this is a financially beneficial situation for ED.

We’re all taxpayers. Your vague answers about your interest in this topic are about as impressive as the worn out banker’s rhetoric you throw up on these boards.

“Mike,” or whatever your actual name is, back up statements like that before you speak. The terms often change without borrowers consent. My loans had protections when I signed them.
Very good piece. Hope to see more.

Mike is my actual name. You may have a case where terms somehow changed without notice, but it’s not as common as you suggest, and that’s what the courts are for. Want to share your story ? Don’t omit any details.

I literally begged Sallie Mae to offer me a reasonable payment amount on my private loans. The only thing they were willing to do was offer a payment amount that took more than 50% of my take home pay. Their representatives told me I could pay, or default and have my wages garnished which would get them substantially less per month than what I offered to pay but do u le the principal on my loan in collection costs. They REFUSED to work with because they know that it is nearly impossible to claim bankruptcy and that they would make more money this way. This has happened to several of my classmates from the same scammy for profit school.

This is the norm. What is worse are the far more egregious and harmful behaviors that the banks are engaging in. For example, Sallie Mae and others have been found to be defaulting borrowers en masse without even attempting to collect on the debt. I suspect this happens very frequently…and because there is no appeals process for default determinations, the borrowers have no recourse.

Any time you have a predatory, bad faithed lending relationship- and it becomes perversely beneficial for loans to default (ie the lender has a clear incentive to provide bad service, confuse/confound the borrower, etc.), this is what happens.

The trades are an excellent alternative to college. Where else can you “Earn while you Learn”? You will be trained in 3 to 5 years depending on the trade, and your wages increase as you go. If you go the Union route you will make between $35-$45/hr, plus benefits and a True Pension (not one of those 401k pension scams) when you “journey out” or graduate! And you will be “student loan” debt free! The counselors at the high schools are all brainwashed into duping our young people into wage slavery (the result of most college degrees and the commiserate student loan debt). There are severe shortages of all skilled trades workers. And women are equally welcome to join most if not all programs. Steer your young towards apprenticeships, not wage slavery. I strongly suggest Union versus non. The end result is better pay, better conditions, and a brighter future!

Read my post above. That being said, I don’t think counselors are “brain washed” so much as it is dictated to them from their chain of command to steer students towards college, no matter what they (the counselors) think.

My apology to any counselors I may have offended. My point was that the trades are no longer presented as a viable alternative to college. Even the military gets better promotion at the high schools. If as you say counselors are dictated as to the steerage of the youth, who is the ultimate source? I mean how far up the chain is it dictated from? It seems to be universal across the country. It also seems that most of the civil and social ills we face today have roots in a little document known as the POWELL Memo. But,I digress.

The fact that the trades are no longer offered as a viable option was exactly my point in my first post, so we are on the same page as far as that goes. On here I’m just saying that councilors answer to people above them and are not the reason that schools push for students to attend college only. How high up the chain I don’t really know. The school board, the district, the city, county, state? I don’t really know. I think at some point in the not too far past there was a general consensus that all kids deserve and should go to college and no consideration was given to the fact that college IS NOT for everyone for any # of reasons. Now so many people are under that impression that without a college degree, a life of poverty and miserly will be the cards laid out. And yeah there are a lot of jobs that have disappeared i.e. jobs going overseas for cheaper labor, automation, etc. That being said there are still many skilled trades that have not and are not going anywhere. The good news as both you and I pointed out is that these skilled trades are hurting for people and are paying very well. Some are even offering to pay for students to take the classes.

“Even the military gets better promotion…” That’s the plan: those who can’t or don’t want to go to college are encouraged to go into the military as the only alternative to college. It’s either college or the military in a national security state like the US.

I’ve started the process of applying for one of IBEW’s (electrician) apprenticeship programs. To my relief, I haven’t yet found anything in the application materials that says there’s an upper age limit (although I haven’t found anything that says explicitly that there isn’t, either.) My biggest concern is that they require high school graduation. I’m hoping there’s hope in the combination of (a) the fact that I dropped out on the last day of senior year (a protest action, of sorts) and (b) they’re asking for high school transcripts, not diplomas. Maybe I should take the GED test just to be on the safe side.

I don’t know if skilled trades can be seen as an alternative to both the military and college. Most of the trades seem to practice preferential hiring/apprenticing of veterans (which I think is right and proper, for various progressive reasons) but assuming the competition over such opportunities is steep (and it really is a form of guild system), it might effectively devolve into military service as a de facto requirement for being a serious candidate. Right now I’m trying to keep my eyes on the prize and not be distracted by statistics. But blue collar conservatives really are a thing, and the labor movement isn’t immune to them. So yeah, I’m planning not to be particularly out-of-the closet about my political opinions, but that’s how I’ve always treated the workplace in general.

The credit card companies seem to do ok with no collateral. They have bankruptcy protections. More to the point: every other type of loan that the government makes or backs has bankruptcy protections, which includes both secured and unsecured loans.

Credit cards most likely charge higher interest rates, a fact “Mike” will most likely explain away with actuarial sleight-of-hand along the lines of “risk premiums” or “moral hazards” or some such. A trend that has been noted recently is surcharges for credit card payments of college tuition. These surcharges are described as being in the tens and sometimes hundreds of dollars, which is to say, honking huge compared to whatever “convenience fees” for credit card transaction are still around in the retail and utility sectors. No doubt this trend toward surcharges reflects universities noticing a trend toward people paying tuition with credit cards, and no doubt that trend is a result of students and parents (being “rational economic actors” in a sense even “Mike” would no doubt understand) deciding credit card interest rates are a lesser evil than non-dischargeable student loans. But what’s in it for the universities? Their nut is covered whether they get paid with plastic or with student loans, unless I’m really missing something. There is no explanation for this phenomenon that is plausible to me that doesn’t involve back-room deals in which banks (who obviously see credit-card financing of education as a loophole, or “gaming the[ir] system”) apply either pressure or incentive (kickbacks?) to universities to institute such billing policies. University-bank collusion on promotion of commercial over government loans is an established fact. Credit card surcharges as a cynical ploy to funnel people back into Sally Mae’s clutches would definitely not be out-of-character for academia’s administrative top tier.

I think “Lori” is missing something, probably because she didn’t read the stories on the link she provided. It appears that the larger tuition amounts are being paid by higher-income parents to earn travel miles or cash back, which many credit cards offer today.
Colleges pay fees to credit card companies -often 2.5 a 3.00 % and are increasingly passing this expense along to people who pay with a credit card. . I am sure there are others who pay tuition bills with credit cards for other reasons, but is likely for smaller amounts.

Credit card rates are what they are and I neither defend nor discredit them. They are, however, a reasonable proxy for unsecured personal loans, which is what student loans would be if we allowed them to be discharged in bankruptcy.

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The Safety Pin

Many Resistance Groups have stood up against the horrible events in Charlottesville and have reacted against the unacceptable response of our President. It is now our turn in North San Diego County to show solidarity with our brothers and sisters in resistance to protest the white supremacist movement.